 Clay Crumbliss |
There’s no shortage of challenges for consumer packaged goods companies in 2022, perhaps more today than at any time in decades. Uncertainty comes with challenges, and with uncertainty comes the challenge of communicating effectively with stakeholders.
COVID-19, nearly two years after our lives were disrupted by the pandemic’s onset, continues to guide our daily lives in many ways.
It’s well known that most packaged food producers benefited enormously from housebound consumers eating more at home over the past couple of years. The most successful were those whose portfolios skew towards meal categories, which replaced many out-of-home consumption occasions. Remote working arrangements were adopted by employees and children could attend school virtually from their living rooms.
The story for beverage companies was mixed. Some categories saw an increase in sales in at-home channels like water, juice, and sodas. Other categories suffered from the significant drop in traffic to bars, restaurants, and other venues that were either closed or operated at reduced capacity. The most pronounced declines were alcoholic beverages where sales in the on-premise channel still haven’t recovered to pre-pandemic levels.
| This article was featured in O’Dwyer’s March. ’22 Food & Beverage PR Magazine (View PDF version) |
Recent retail scanner data has shown that consumption patterns are becoming more normal. However, the emergence of new variants of the virus—and how consumers, employers, governments and educators choose to respond—will likely continue to prove disruptive to food and beverage consumption patterns, at least in the short term.
Although COVID-19 sales volatility is less significant than it was last year but managers still face significant challenges because of the almost unprecedented levels of inflation in input costs. These higher costs are impacting corporate margins, regardless of how economists or market commentators may attribute the spike. They affect all aspects of the food and beverage supply chain, including shipping, logistics, and ingredients.
This is evidenced by recent examples such as Kellogg, which said it expects “double-digit” input cost inflation in 2022, while competitor General Mills is targeting a seven to eight percent increase for the year and Conagra told investors to expect a 14 percent jump. This is because, on average, the annual cost for goods inflation for packaged foods companies was between 2 and 3 percent in the years prior to the pandemic. This was based on a selection of management comments.
The obvious result for the consumer will be higher prices at register. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index measures the price of a basket of consumer goods and rose 7.5 percent in the twelve months ended January. At-home food prices increased 7.4 percent. In general, as consumer prices aren’t rising as quickly as the costs borne by manufacturers, margin pressures will likely persist throughout most of 2022.
All this volatility on both top and bottom lines leaves management teams with the difficult internal debate of how they can set external expectations that are balanced between optimism and pragmatism, while still allowing for hope and disappointment for their stakeholders.
Many companies chose to withdraw their guidance metrics during the initial days of the pandemic due to the lack of visibility in market. Investors were generally well aware of the huge challenges involved in forecasting accurately and granted management teams a pass for a time.
As the quarters have passed, this approach has become less acceptable as the operating environment remains uncertain. It’s clear how the demand for transparency from market participants can easily be in conflict with management’s lack of future visibility, and it begs the question of how firms should be communicating in an exceptionally volatile 2022.
When it comes to the necessary, often burdensome—as many finance chiefs might candidly admit—task of providing annual guidance, marketplace complexity isn’t an excuse for missing numbers. According to data from Nasdaq investors are showing less tolerance for earnings misses, which is causing stock price compression that has been more prominent than in previous years.
The market will judge executives on how well—or how poorly—they communicate almost as much as it will judge the operations and financial results they put forth. As we like to tell our clients, “the numbers don’t speak for themselves.” Of course, performance and results matter, and successful companies will ultimately be rewarded with higher valuations; but, the perception and understanding of those results can be a significant driver of a firm’s market valuation and, importantly, its reputation. Communication with your audience is crucial when there are high stakes.
Be clear. If the message confuses your audience, it’s highly unlikely it will achieve the intended outcome. Be as specific as you can when it comes to financial guidance. We advise clients to not leave key metrics open to interpretation. It is important to set expectations in a thoughtful and deliberate manner to ensure that you communicate the message accurately.
Be consistent.Investors expect consistency to avoid unexpected events. Be consistent in all interactions with investors, analysts, journalists, and employees. Although the information you provide to certain constituencies will vary depending on their audience (e.g., your board may have different information than your investors), you should communicate the same basic expectations with all your stakeholders using a consistent message that is almost predictable.
Be realistic. This is often the most challenging point for managers—and sometimes even more difficult for founders. There’s a fine line between “selling your story” and overstating the positives in the face of obvious adversity. Executives who are too frank about reality will get stock in the red zone faster than anyone. Your audience will appreciate your candor and may even reward it, as investors are looking for transparency and stability. As it relates to giving guidance, the “beat-and-raise” approach is a time-tested, proven strategy to generate positive news that moves stock prices higher and creates trust between the investment community and management teams.
Your audience values trust far more than undue optimism. Today’s dynamic marketplace means the tides can shift quickly in ways that may or may not be within the company’s control: supply chain constraints, product out-of-stocks, or labor shortages, to name a few. The market’s reaction and your company’s reputation can depend on how proactively you acknowledge the shift, provide transparency and reset expectations given the new realities.
Communication professionals have to manage the message and control the narrative every day. Whether it relates to corporate strategy, financial guidance, brand management or any other aspect of a CPG company’s identity, we recommend a deliberate and precise approach to matters of public relations and investor relations. Although information is easier to access than ever before, the markets in which companies are operating are becoming more complex and interconnected. Your communications approach should be the same.
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Clay Crumbliss works as a Managing Director for ICR, Inc.
